There are many factors that determine best timing for selling a vending business - the financial condition of the company, valuation, growth cycle, profit history and the current market. Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward with a history of good performance. This gives buyers confidence in projected future earnings.
Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, stock market volatility, competition, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.
Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors.
So how should you determine if 2018 would be the right time for you to sell your business? The following are five factors for Canadian business owners to consider.
1. First, get a business valuation to determine what your business is worth in the current market. This is an initial step in determining if a sale would meet your objectives. An experienced broker who is a chartered business valuator will do it for free. Valuators like us will do it free. Do not get sucked into a $10,000 invoice that some business valuators will request.
2. Understand that the current status of the mid-market business marketplace in provinces like Ontario is one of the best in Canada and policies are in place for continued prosperity and growth in the province. The same applies for Quebec. Ontario is going to pop up on a lot of radar screens as a place to relocate or expand for businesses. Ontario gained more residents than any other province as the recession deepened in 2008 and early 2009 as job seekers migrated to one of the nation's strongest labor markets. The Toronto metro area enjoyed the second largest population growth than any other city in 2009 and has the second highest number in Canada.
3. Buyers in every category are looking for alternatives to traditional investment avenues. They are looking for stability, better predictability and control. Business acquisitions offer all of these and can also offer a better return than traditional investment opportunities. Ontario and Alberta are prime targets because of future economic expectations and long-term outlook. The large U.S. vending operators are seeking expansion. We know them.
4. The capital gains tax rate is presently at historic lows at 15 per cent. As of March 1, this rate increased by 52 per cent. Therefore, business owners considering a sale should sell by Dec. 31 2018 in order to keep more of their proceeds. In the U.S., as reported in the Wall Street Journal on Nov. 12, 2017, Congress is planning "a 5.4% surtax on incomes above $500,000 for individuals and $1 million for joint filers" to fund health care reform, which will affect both capital gains and dividends. If passed, the surtax goes into effect Nov. 1, the same day the tax rates of 2001 and 2003 are set to expire. The current capital gains tax rate would rise to at least 20 to 25.4 per cent with the surtax. This represents a 69 per cent increase overnight. Trump's policies will also be affected by state and local tax changes.
5. Most importantly, even in our current economy, buyers exceed sellers and we have a robust small business exit market for now. The time will come when the flood of baby- boomer business owners ready to sell will outweigh the ready buyers. Fueling the market are the different categories of buyers looking to put their money to work by acquiring profitable businesses in areas with a good economic future:
- Early baby-boomer corporate retirees
- Management-level refugees who have suffered a downsize and typically have severance pay or pension funds to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, do not look attractive to these corporate refugees at this time in their lives
- Foreign vending buyers seeing U.S. businesses as investment opportunities while the dollar is valued lower against their own currency
- 30-something up-and-comers aggressively buying and building
- Strategic buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation. (Merrill Datasite, Dec. 2017)
- Investment Buyers, such as private equity groups, "are going down-market" (Merrill Datasite, Dec. 2017) and are seeking add-on acquisitions in the lower middle-market for their investment portfolios
- Blue collar workers who have been laid off are also looking to "buy a job" through smaller vending companies.
However, because it can take anywhere from six to 12 months on average to sell a private company, we suggest that business owners considering a sale prepare now so they can take advantage of this exceptional, impermanent window of opportunity.
With all categories of buyers in play, historic low interest rates with the government working to make credit more readily available, the capital gains tax rate the most favorable in 30 years, and the positive future outlook of the Ontario economy, it appears to be an excellent time for business owners in Ontario to explore their opportunities for exit.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp. Mercantile is a Toronto, Canada M&A. www.mercantilemergersacquisitions.com